Whether you are new to the contractor scene or you have made this your way of life for years, tax season can confound and overwhelm every year. For most contractors, combing through piles of tax forms to determine which one you are required to fill out is the hardest part.
One of the most confusing distinctions contractors have to make is between Form 1040 and Form 1099. Which one matters? In short, they both do.
Form 1040 and you
Many professionals have encountered the 1040 before, whether they remember it or not.
Form 1040 is the standard income tax form used by the IRS. Everyone who reports income, both full-time employees and contractors, have to fill out the 1040 annually.
Form 1099 and you
If this is your first year working as an independent contractor, you may not have ever seen a 1099 before.
As a contractor, you should get a 1099 from any client who paid you more than $600 during the tax year. This form functions the same as a W2. You may receive more than one, depending on how many clients met the payment criterion over the year.
During tax filing, you would use the information provided on your 1099 to fill out your annual income on the 1040, just as you would with a W2 provided by an employer.
Why the 1099 matters
Contract workers should take note of which form their clients send them at the beginning of the tax year.
A full-time employee pays income taxes through automatic paycheck deductions. When an employee uses a W2 to fill out their income tax reporting, they usually are not responsible for paying the income tax at that time.
As a self-employed contractor, your payments usually do not include automatic deductions to address taxes. During tax filing, you are responsible for paying the taxes on the income listed on your 1099.
If you believe that you are an employee of a company, not a contractor, and you receive a 1099 instead of a W2, contact your employer immediately. Understanding the differences between these tax forms is something every contractor or self-employed worker should know.